And because it is an earnings number before

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: And because it is an earnings number before depreciation and amortization, it is not affected by the method the company chooses to spread the capital costs over the assets’ useful life. However, EBITDA, though Also known as … EBITDA is also known as operating income before depreciation and amortization, or OIBDA. 1 useful in some applications, is does not fully reflect the cash flows of a company. The requirement that companies report cash flow information in the statement of cash flows provides information that is useful in financial analysis and valuation. This statement requires the segregation of cash flows by operations, financing, and investment activities. A key cash flow in both analysis and valuation is the cash flow for/from operating activities. This cash flow is calculated by adjusting net income for non-cash expenses and income, as well as for changes in working capital accounts. This latter adjustment is used to convert the accrual-based accounting into cash-based accounting. The calculation uses information from both the company’s income statement and its balance sheet: (EQ 3) CFO = Net other non-cash increase in + depreciation + amortization + income charges (income) net working capital Net working capital is defined as: (EQ 4) Net working capital = Current assets – current liabilities Therefore, if net working capital increases, this is an offset to cash flow from operations, whereas if net working capital decreases, this is an enhancement of the cash flow from operati...
View Full Document

Ask a homework question - tutors are online